The Stock Market’s Next Move Is Lower. It’s Not Just Russia and the Fed.
The only thing standing between the stock market and a full-blown correction might have been a long weekend.
The S&P 500 index SPX-0.72% fell 1.6% this past week, while the Dow Jones Industrial Average DJIA-0.68% dropped 1.9% and the Nasdaq Composite COMP-1.23% lost 1.8%.
Despite all that, it’s easy to look at this market and consider the losses a victory. The week’s decline was uncomfortable, but the S&P 500 is still 0.5% above its January closing low. It has taken a beating from Ukraine and Russia and from concerns about the Federal Reserve and higher interest rates over the past three weeks, but it hasn’t made a new low. The index even managed to bounce back from a near-correction on Friday, though it still finished the day lower.
But it may be just a matter of time before the ground under the market gives way. For one, it hasn’t been able to rally on days when it looked like it should have. On Thursday, oil prices declined, as did bond yields and the odds of a half-point rate increase. That should have been good news. Instead, the Dow fell 1.8%, its worst one-day decline of the year.
Friday’s cutting of losses after another large drop, however, might be less than it seems if only because of the long Presidents Day weekend—one that, if you’re a trader, you might prefer to enjoy without having to worry about Tuesday’s action. “We continue to recommend caution and want to see a genuine flush before stepping up to buy this market,” says Nicholas Colas, co-founder of DataTrek Research.
That flush has already happened for some parts of the market. Some 20 stocks in the Russell 1000 RUI-0.79% dropped 15% or more this past week, including Roku ROKU-22.29% , Fastly FSLY-2.60% , DraftKings DKNG-21.62% , Albemarle ALB-3.18% , and Paramount Global PARA-3.30% , formerly known as ViacomCBS. The iShares Expanded Tech-Software Sector IGV-2.14% exchange-traded fund, which holds some of the market’s most speculative tech names, dropped 5.4% this past week and has fallen 18% this year.
More selling may be on the way. The decline in U.S. stocks has been driven by a rotation from the U.S. to Europe and from growth stocks to value, according to Citigroup strategist David Groman. But the dollar amounts driving the rotation have been relatively small, he says, which could mean there’s more to come.
“[We] have seen very tentative signs that these trends may be reversing,” Groman writes. “There is still plenty of capital available to drive further rotation.”
Russia is likely to remain an issue, says Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. The problem could be even greater for Europe, where a recession could be in the offing. “We continue to believe that geopolitical risk emanating from Russia/Ukraine is not priced into the U.S. equity market, should conditions worsen, and will be a key issue to watch in the weeks and months ahead,” she writes.
The market, however, will still have to contend with the Fed. Yes, the odds of a half-point rate hike in March have decreased. But if the Fed does hike by just a quarter point, it could mean it has to go faster for the rest of the year if the inflation data don’t let up.
For now, the path of least resistance for the market still seems lower.